By Rhod Mackenzie
On the first day of July, a unilateral reduction in Saudi Arabia's (KSA) oil production by 1 million barrels per day began to take effect. Now the negative consequences of this voluntary decision of Riyadh on the Saudi economy are becoming more and more clear. This was immediately reflected by IMF economists, who significantly lowered their forecast for the development of the Saudi economy for the year: if in May they predicted a growth of 3.1% by the end of 2023, now they have reduced it to 1.9%. Analysts and experts are now closely monitoring the developments in the kingdom in anticipation of significant changes in economic strategy that may follow as early as early autumn.
Despite the efforts to diversify the Saudi economy, spelled out in the Vision 2030 program, the largest Arab kingdom cannot boast of particular success in this important issue and is still heavily dependent on revenues from the sale of hydrocarbons. The oil industry continues to be a much more significant factor for the entire economy of the KSA than other sectors that are not related to hydrocarbons. The implementation of all more or less significant projects in the kingdom still depends on the amount of petrodollars that Aramco earns mainly.
At the latest OPEC+ summit, KSA Energy Minister Prince Abdulaziz bin Salman, by the way, brother of the Crown Prince and likely future King Mohammed bin Salman, announced the extension of the reduction in oil production to August. There is a widespread belief in Riyadh that no one but Saudi Arabia is in a position to control and stabilize the oil markets and, in particular, control the price of oil. However, writes Oil Price (OR), many analysts doubt the true motives for the reduction in production. These economists see oil price fluctuations as natural to oil markets and intervention as unnecessary. Naturally, they doubt the correctness of the latest actions of Riyadh. Markets, they argue, reacted sluggishly to the announcement of a cut in production, and prices did not rush upwards, as Riyadh probably expected. The slow recovery of the Chinese economy after the lifting of coronavirus restrictions and low global demand keep oil prices in the range of $75-85 per barrel. As for the recent rally, economists believe it is not due to the actions of the KSA on production levels, but to the weakening of fears of a global recession and the withdrawal of shares.
Projects to diversify the Saudi economy require massive foreign investment (FDI), as well as increased government revenues and access to international financial markets. The latest IMF forecast contains doubts about all three components of the successful implementation of these important projects for the Saudis. Given the decline in GDP growth forecasts in MENA (Middle East and North Africa) and the potential for financial crises in some countries in the region, Riyadh will have to reconsider its economic strategy in the short term. The non-oil sector of the Saudi economy is indeed dynamic. Its GDP is growing rapidly, but this sector, at least for now, cannot fully offset its dependence on oil revenues. The low FDI inflow in the first quarter is worrying Saudi economists. The lack of investment from abroad is especially noticeable against the backdrop of high expectations built into the Vision 2030 program.
Significant changes in economic strategy, the need for which more and more economists are now talking about every day, may occur in the near future. Although, of course, not at the next meeting of the Ministerial Monitoring Committee of the OPEC + agreement (JMMC), which will be held on August 3. Most likely, they will be associated with an increase in oil production. They will be announced, according to the OR, in September. Now, Riyadh is likely working on a surprise move that will keep a barrel from rising above $90-$100 in the fourth quarter.
This article originally appeared in Russian at expert.ru